ANALYSIS-Rajoy's bailout shyness adds to Spain's risks

October 31, 2012|Reuters

* Rajoy sees no urgent need for a bailout

* Improved conditions do not change view Spain needs bailout

* Rajoy pressured on multiple fronts to make request

By Julien Toyer

MADRID, Oct 31 (Reuters) - The longer Prime Minister MarianoRajoy puts off asking for aid from the euro zone, the greaterthe risk of further financial turmoil and an even worserecession in Spain, analysts say.

Promises of help from the EU and the European Central Bankhave brought Spain's borrowing costs down from unsustainablelevels in the past few months. But ironically, if Rajoy ispersuaded by the improved market conditions that he no longerneeds to ask for help, it could make the situation worse.

A government source told Reuters on Wednesday that the primeminister had not ruled out applying for a rescue, but deficitcutting progress at home and EU movement toward a banking unionboth give the government breathing room.

"That doesn't mean we won't ask for it, but we don't see itnecessary (right at the moment)," the source said. Earlier thismonth another source familiar with Rajoy's thinking told Reutersthat Spain will seek aid, but will not rush into it.

Under the proposed programme, countries such as Spain couldseek aid from the European rescue fund, the European StabilityMechanism, which would trigger bond buying by the central bankto stabilise borrowing costs.

The central government is already 95 percent funded for 2012and will begin pre-funding 2013 in bond sales this year, whichseems to give Rajoy breathing room to delay a decision.

But analysts say putting off a request for a precautionarycredit line is wasting precious time to fix the euro zone'sfourth biggest economy, already shrinking for five quarters.

Uncertainty has frozen business investment, and jobdestruction is expected to continue next year, worsening anunemployment rate already at 25 percent.

The delay gives time for doubt to surface among investorswhether the ECB plan will do more than buy Spain a few monthsbefore it needs a full bailout. Madrid could see its sovereigndebt downgraded to junk status, lose market access and be pushedinto a fully fledged rescue that would come with more drasticconditions than those attached to the credit line now on offer.

MAIN FOCUS OF CRISIS

Spain has been the main focus of the three-year-old eurozone debt crisis for the last nine months and has alreadyobtained a credit line of up to 100 billion euros for its banks.

After jumping higher than 7 percent in July, the yield onSpain's benchmark 10-year bond has come down in anticipation ofECB action and is currently about 5.6 percent.

Yet the dominant view among investors, analysts and sourcesinvolved in talks on the issue is that the market relief is onlytemporary unless the ECB actually acts.

"We disagree with those who believe a bailout is not needed.We think there is no other way out except a bailout," saidCredit Agricole-Cheuvreux in a note last week.

Italian Prime Minister Mario Monti said this week that inorder to restore confidence, the ECB bond-buying needed to bereal, not just a plan. The International Monetary Fund expresseda similar view earlier this month.

Diplomatic sources say French President Francois Hollandehas also applied pressure on Rajoy to take the bailout.

Senior business executives have been calling publicly on thegovernment to press ahead with the rescue, as have Spain's twobiggest lenders, Santander and BBVA.

Two senior euro zone officials with direct knowledge of thematter said earlier this month that they and others werepreparing the ground for a request to be made in November.

However, Rajoy has given continued signs he will not rush unless market conditions take a significant turn for the worse.

The prime minister has built his career on caution, said aSpanish economist who asked not to be identified: "Rajoybelieves time cures everything, that's his signature strategy,his genetic trait."

Rajoy also has domestic resistance to consider. A rescuecould come with demands for more budget cuts, opposed bydemonstrators who march in the capital several times a week.

Sources familiar with Rajoy's thinking have said he wants tomake sure conditions attached to a rescue are minimal, and thatthe aid would not just create more risks for Spain.

Savings from previous austerity measures, which includepublic wage cuts and lower spending on schools and hospitals,have so far been eaten up by higher unemployment and socialsecurity payments and interest payments on public debt.